Economists React: China Inflation Hits Five-Year Low

100-yuan notes are seen in this illustration picture in Beijing in this November 5, 2013 file photo.

Reuters

China’s consumer and factory level inflation figures came in weaker than expected in November, with the consumer price index (CPI) up only 1.4% year-on-year for its slowest gain in five years and down from 1.6% in October. The producer price index (PPI) doggedly moved lower for the 33rd consecutive month, with the decline accelerating to 2.7% year-on-year from 2.2% the previous month. Sluggish domestic demand, an easing of food price increases, and slumping prices of oil and other global commodities likely contributed to the weak data.

Some economists saw this as an opportunity for policymakers, currently meeting in Beijing to set economic priorities for next year, to speed up price-related reforms. Others focused on the prospect of deflation and the likelihood of monetary easing policies in the face of continuing economic weakness. Here’s the take on the numbers from the economists (edited for style and length):

The figures are weak and they reflect weak demand and a weak economy. On the good side commodities prices are slumping. But the real economy needs liquidity and in the next six to 12 months we expect two interest rate cuts and three to four cuts in the bank reserve requirement ratio– Larry Hu, Macquarie Securities

Looking ahead, although food inflation is likely to rebound mildly from mid-first quarter of 2015 onwards, overall inflationary pressure will remain low in 2015. Meanwhile, easing commodity prices will keep the PPI low in the medium term. Policy wise, the low inflationary environment will encourage authorities to implement more monetary easing. We expect an reserve requirement ratio cut to take place as early as December, especially given tightened regulations for corporate bond repurchase collateral policies –Fan Zhang, CIMB

Overall demand is weak and this weighed on the consumer price index. Deflationary pressure on the PPI is considerable…For December, we think the CPI and the PPI could continue to move lower. Deflationary risks have clearly increased – China International Capital Corp. economists

China’s overcapacity and weak demand are to blame, but we believe the major driver of the recent decline in headline inflation readings is the slump of global oil and other major commodity prices. Low inflation readings are negative for the yuan as markets expect some depreciation of the Chinese currency to cope with the deflation risk, but for maintaining financial stability, in our view, the People’s Bank of China won’t allow a significant depreciation, as evidenced by the strengthening of the (official) fixing again today. While some market participants might take lower inflation readings as signs of weak demand, others might believe low inflation will give Beijing more room for policy easing – Lu Ting and Xiaojia Zhi, Bank of America-Merrill Lynch

A fall in inflation to a five-year low last month may add to deflation fears but we thinksuch concerns are overplayed. Easing inflation is being driven by falls in global commodity prices which should, on balance, benefit most firms and households. Looking forward, we expect price pressures to moderate further going into next year…A glut of unsold properties should prevent much of a pickupin housing cost infla tion while falling oil prices should keep transportation costslow. Broadly speaking, this should boost household spending power.Finally, the wider fall in industrial commodity prices is likely to push year-on-year growth in producer prices even deeper into negative territory in the months ahead. But provided that profit margins for industry as a whole remain healthy, as they have over the past couple of years, then the falling PPI shouldn’t be seen as a sign of distress in the industrial sector. — Julian Evans-Pritchard, Capital Economics